Equity Release mortgages: what they are and how they work.
Equity is money that is tied up in property. It forms part of your estate and wealth, but you don’t have instant access to it. Equity Release is a way of accessing this wealth if you are aged 55 or over, while allowing you to remain living in and owning all or part of your home. It can offer a good way to release funds in later life, but of course there are pros and cons to Equity Release, and it is not a process that should be entered into without assessing all the options available.
Equity Release enables homeowners to release funds in small amounts as needed or in a lump sum or as a regular income. There are two Equity Release options available, lifetime mortgages and home reversion plans. They each have a different appeal and will depend on your age and health, as well as the property’s value. Equity Release will also have a bearing on your family’s inheritance, if applicable.
The most common and popular form of Equity Release, accounting for most of the Equity Release market and available from age 55 and over is a lifetime mortgage. As the name suggests, this is a mortgage that lasts for the duration of your lifetime. The mortgage will end either on death or if you enter long term care. It is secured against your home and you retain 100% ownership of the property.
Here are some key points:
- Interest accrues throughout the lifetime of the mortgage so if no repayments are made, the final amount owed could be substantially more than you borrowed.
- There are several lifetime mortgages options to offer flexibility to homeowners. These include repayment options to reduce the final debt and interest-only lifetime mortgages.
- It is possible to have the equity released as a lump sum or in smaller, more gradual payments. This is known as a drawdown facility. Be aware that interest on a large lump sum will accrue more quickly than several smaller amounts spread out.
- You can protect – or ring-fence – a percentage of the value of your property for inheritance purposes. Doing this will reduce the amount of equity available for release.
Home Reversion Plans
These used to be the preferred Equity Release option but are now less popular than lifetime mortgages. Home reversion plans are available to those over 65 years old (or 60 for some lenders) and involve selling part of the property to a lender in exchange for equity. You retain the right to remain in your home for the rest of your life or until you go into full-time care.
Here are some key points:
- It is important to check how much of the market value you will receive for the property once it is sold. This will vary depending on the length of the reversion plan – and the more the value of your property increases, so the amount the lender is owed increases.
- You can ring-fence a percentage of your property for later use, such as inheritance. That percentage will always remain the same, regardless of the change in property values, unless you decide to take further cash releases.
- You can release the equity in a lump sum or smaller payments – or a combination.
These are just some of the many factors to consider when considering Equity Release. What is right for one person may not be suitable for another.
We would always recommend seeking professional whole of market mortgage advice.
Swift Mortgages specialises in Equity Release products and can advise on products from the whole market. We will help you find the right mortgage for your circumstances.
Equity release can be more expensive than a traditional mortgage.
There is no ‘fixed term’ by which they would have to repay the loan so accrued interest may escalate quickly.
Equity release arrangements may reduce the value of your estate and affect your entitlement to state benefits.
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